How 'The Hobbit's' Billion-Dollar Box-Office Haul Shrank by $90M

A stronger dollar is slamming the studios amid the global currency crisis as the euro hits a nine-year low, the value of Russia’s ruble is sliced in half and the all-important returns from international collapse: "It is a serious problem."

This story first appeared in the Feb. 13 issue of The Hollywood Reporter magazine.

By most measures, The Hobbit: The Battle of the Five Armiesis a runaway success. The final film in Peter Jackson's Middle-earth saga drew at least as many foreign moviegoers as the previous two installments, which grossed $1 billion and $960 million, respectively. But thanks to plunging exchange rates around the globe, Warner Bros. and MGM ultimately will take in nearly $90 million less than they planned on receiving.

The 15 percent drop is the most dramatic example of the precarious financial position Hollywood studios find themselves in because of shifting currencies. Battle of the Five Armies had grossed north of $620 million offshore as of Jan. 29 for a worldwide total of $867 million. Were it not for the exchange-rate debacle, the film could have crossed $1 billion.

For years, film companies, like all U.S. corporations that export goods, have benefited from favorable exchange rates and a weak dollar. During that period, international box office has seen dramatic growth, so the proceeds were mighty. But in the autumn, rates began historic declines as the dollar gained strength and other currencies tumbled. In December 2013, one euro equaled $1.38. A year later, that dropped 11 percent. As of Jan. 29, one euro equaled just $1.13. Things are even worse in crisis-ridden Russia, where studios are getting back 50 percent less than they did a year ago. Studios also are seeing diminished returns in Australia and Latin America.

"We've never seen a drop in so many currencies at once," says Nancy Carson, executive vp at Warner Bros. International. "We're getting hit everywhere."

In Europe, the Jan. 25 elec­tions in Greece that elevated the left-wing Syriza party to power only added to concerns that the continent could return to the euro crisis of 2008 and 2009. New Greek Prime Minister Alexis Tsipras has demanded that the country's creditors, including Germany, forgive at least half of Greece's public debt of more than $350 billion. The biggest danger to Hollywood is that Tsipras' confrontation will trigger a run on the euro, sending the already weak currency on a downward spiral that will further damage studios' bottom line. Right after the news hit, the euro briefly fell to its lowest level against the dollar in 11 years; it has recovered slightly but was at a nine-year low Jan. 29.

Russia, a booming moviegoing market, particularly for big-budget spectacles, is even more of a sore point. The Russian ruble has collapsed against the dollar because of a sharp dive in oil prices and economic sanctions against Moscow. Ratings agency Standard & Poor's recently downgraded Russia's sovereign credit rating to junk status. "It is a serious problem," says Fox co-president of worldwide marketing and distribution Paul Hanneman. "When we opened Exodus: God and Kings in Russia in early January, we did like $8 million. Maybe we would have done $12 million at the previous exchange rate." Warners says it got back $25.5 million for Battle of the Five Armies versus $45 million for the second Hobbit, even though attendance didn't decline.

There's a similar if some­what less dramatic story in Latin America, where the Brazilian real and Mexican peso each has fallen 12 percent against the dollar. "As a result, international could be an increasing source of volatility going forward," Janney Montgomery analyst Tony Wible wrote in a recent report.

Major studios aren't the only ones suffering. The Hunger Games: Mockingjay — Part 1outperformed The Hunger Games: Catching Fire in both France and Germany, but dollar revenue dipped in both territories. For an independent title like Hunger Games, the currency drop hits the local buyers, who pay in dollars but collect in euros. "If the euro weakens, it will have a real impact," says Al Munteanu, CEO of German distributor SquareOne Entertainment.

If there is a silver lining, it's that studios are spending less on marketing in those territories. "From a holistic standpoint, you are seeing a savings," says Carson. But there's little question the exchange rate is hurting the bottom line. "If we are expecting to make $200 million, let's say, and you earn only $150 million or $175 million, the impact can be considerable," says Hanneman. "It's never good for us on the international side when the exchange rates move in this direction. We just have to presume they will turn around."